“We used to live in a world where there were private citizens, and a world where there are businesses. Now we’re living in a world where people can become businesses in 60 seconds… I think our core invention, the thing that we have brought back, is trust…We used to trust big corporations; now for the first time we can trust complete strangers…Think of this as the internet moving into your neighborhood.”

In the same interview Chesky goes on to cite the example of the World Cup in Brazil, where out of an estimated total of 600,000 visitors, 120,000 – or 1 in 5 – are staying in Airbnb accommodations. He said that Brazilian authorities consulted the company prior to the event because of concerns that the country’s hotel and guest-house industry would not be able to cope with this many visitors all at once, especially in cities unaccustomed to receiving large numbers of visitors.

In these relatively early days of the sharing economy, not surprisingly there is some confusion about what this suspiciously altruistic-sounding name actually means. Are we talking about professionally organized businesses or neighborly acts of generosity? Are people supposed to charge fees and make a profit or is this about bartering or even just lending or giving? This is what Wikipedia tells us: “The Sharing Economy (sometimes also referred to as the peer-to-peer economy, mesh, collaborative economy, collaborative consumption) is a socio-economic system built around the sharing of human and physical assets. …These systems (leverage) information technology to empower individuals, corporations, non-profits and government with information that enables distribution, sharing and reuse of excess capacity in goods and services.” So if you strip away the jargon the original concept here is the sharing of unused or surplus goods, allowing the owner to make some extra cash. In many but not all cases this activity is more of a sideline than anyone’s full-time business, although things are changing quickly in this regard as people start to see how to build a full-time business in the Airbnb marketplace. More on this point later in this post.

Technology is never perfect or uncontroversial, but on those occasions when human creativity and technological innovation intersect with political, societal and economic shifts, the results can be dramatically beneficial. One of the most critical ingredients for the success of sharing-economy businesses that Chesky points to is trust between individuals, facilitated by a third party such as Airbnb. Indeed, when talking about the peer-to-peer economy, New York Times op-ed columnist David Brooks titled his July 1 column “the evolution of trust”, using Airbnb as his main exemplar. An early skeptic about the chances of Airbnb succeeding, Brooks cites the impressive numbers that demonstrate how the company has hit a nerve among people everywhere who are indeed willing to rent out space in their homes to near strangers. Key stats about the company today include 550,000 homes currently being shared by hosts with their guests, Paris being the largest destination city today, and currently 34,000 cities in 190 countries offering rooms or properties for rent.

As we are seeing today with other exemplars of this new collaborative economy such as BlaBlaCar, Etsy, Kickstarter, eLance, Lyft, Odesk, and Taskrabbit, this new socio/economic/technological phenomenon is going global very quickly. In Airbnb’s case, this viral growth helps to explain the company’s most recent $10bn valuation (don’t be surprised if you hear in a couple of quarters’ time about a new valuation in the region of $20bn or more). As I outlined in my last post, on Uber’s equally impressive growth and valuation, this exponential global growth helps to explain the spiraling valuation of both companies.

David Brooks is by no means the only journalist to have identified the potential of asset-sharing as a global phenomenon. The Economist, Wired magazine, Techcrunch, and many others have published articles recently on the same topic. And authors of recent books on this subject include Rachel Botsman and Roo Rogers (What’s Mine is Yours) and Lisa Gansky (The Mesh Economy). Undoubtedly their research and ideas have influenced Brooks’ conclusions. As he states in his op-ed, “The big thing I underestimated (about the peer-to-peer economy) was the transformation of social trust. In primitive economies, people traded mostly with members of their village and community. Trust was face to face. Then, in the mass economy we’ve been used to, people bought from large and stable corporate brands, whose behavior was made more reliable by government regulation. … But now there is a new trust calculus, powered by both social and economic forces. Socially, we have large numbers of people living loose unstructured lives, mostly in the ten years after leaving college and in the ten years after retirement.” In this post I shall lean on Brooks’ commentary and insights before describing the strategic imperatives that I believe newcomers need to make part of their fundamental business strategy, using Airbnb as my main example. To complement this, I have some suggestions for those incumbent organizations in the travel/accommodation industry that in many cases feel intensely threatened.

Continuing his description of the socio-economic factors at play, Brooks observes that “These people often live outside big institutional structures, like universities, corporations or the settled living of family life… People are both hungrier for human contact and more tolerant of easy-come-easy-go fluid relationships (and) more individualistic in how they earn money. They often don’t go to an office. They have traded dependence on big organizational systems for dependence on people they can talk to and negotiate arrangements with directly. They become accustomed to flexible ad-hoc arrangements.” His main conclusion is that what we see emerging is “a personalistic culture in which people have actively lost trust in big institutions. Strangers don’t seem especially risky by comparison. This is fertile ground for peer-to-peer commerce.”

Brooks cites three underlying trends that have enabled the peer-to-peer sharing economy, which I have augmented with my own comments, as follows:

The effects of middle-class stagnation: With wages flat and families squeezed, many people have found it necessary or helpful to return to the boardinghouse model of yesteryear.

The power of liberal arts majors in the economy: Millions of people have finished college with a hunger for travel but without much money. They would rather stay in spare rooms than homogenized and expensive hotels. My own take on this is that although the main point makes sense, I’m not sure that it’s a function of just the role of liberal arts majors as much as it is about increasing numbers of people of all disciplines who love travel or need to travel on business and want to avoid paying through the nose for hotel rooms that in many cities are either relatively expensive or just unenjoyable to stay in.

The transformation of social trust: This is the phenomenon that Brooks describes as a new trust “calculus”. This goes back to the issues of increasing numbers of people living more unstructured lives outside of big institutions, and now accustomed to easy-come-easy-go interactions aided by a trustable internet middleman such as Airbnb. If you’re not yet a host or renter with Airbnb, you’ll see later in this article what the company does to inspire trust among both its owners and renters.

As we have become accustomed to with eBay, Amazon, Netflix, Yelp, TripAdvisor and other web 2.0 companies that introduced recommendation engines and/or review mechanisms into their commerce platforms, we now see companies like Airbnb establishing trust with their customers and providers through various similar means. In the case of Airbnb (and other SE companies) these mechanisms include simple but reliable verification of renter’s identities by asking them to sign in through one of the major social networks, reviews on the site of hosts and their properties, and recommendations from peers on social sites such as Yelp, TripAdvisor, Twitter, or Facebook. In this way, the age-old concept of word-of-mouth gets an internet-enabled rocket-boost – multiplying the number of people who benefit from each recommendation and dramatically shortening the time between their decision to rent and a deal being confirmed with the host to seconds. This is a perfect example of the internet fulfilling its longstanding promise to dramatically reduce transaction costs. As for hosts, who have a lot to lose if their properties are trashed or items are stolen, today they receive a $1m. guarantee underwritten by Airbnb for many (though not all) property items. This removes – or at least reduces – the risk that they will lose out financially in the event of suffering losses of household items or damage to their homes.

As Jason Tanz’s April 23 cover article in Wired Magazine observes, “The sharing economy has come on so quickly and powerfully that regulators and economists are still grappling to understand its impact. But one consequence is already clear: Many of these companies have us engaging in behaviors that would have seemed unthinkably foolhardy as recently as five years ago. We are hopping into strangers’ cars (Lyft, Sidecar, Uber), welcoming them into our spare rooms (Airbnb), dropping our dogs off at their houses (DogVacay, Rover), and eating food in their dining rooms (Feastly). We are letting them rent our cars (RelayRides, Getaround), our boats (Boatbound), our houses (HomeAway), and our power tools (Zilok). We are entrusting complete strangers with our most valuable possessions, our personal experiences—and our very lives. In the process, we are entering a new era of Internet-enabled intimacy. … This is not just an economic breakthrough. It is a cultural one, enabled by a sophisticated series of mechanisms, algorithms, and finely calibrated systems of rewards and punishments. It’s a radical next step for the ¬person-to-person marketplace pioneered by eBay: a set of digi¬tal tools that enable and encourage us to trust our fellow human beings.”

One critical ingredient that reinforces importance of trust is something that most of these companies have had to learn the hard way, from customers or providers who committed one form of abuse or another. Even the earliest harbingers of the sharing economy such as eBay and Craigslist have had their scandals to deal with in the past. In its early days eBay suffered from fraudulent sellers, or buyers who wouldn’t pay for a collectible that they had agreed to buy; and over the years Craigslist has suffered scandals about fraudulent advertisers, prostitutes advertising for clients, etc. More recently, there’ve been headlines about Airbnb hosts arriving home to find their property trashed. Crowdfunding site Kickstarter has not yet managed to shake an early reputation for startups that raised funding but failed to deliver on commitments to their backers, and Lyft has been embarrassed by car accidents that showed some of its contracted drivers lacking sufficient passenger liability insurance. Consequently, these companies as well as Uber, RelayRides, and many others are having to spend time and money policing their own customers, partners and providers.

Besides policing basic performance requirements, a rapidly-increasing plethora of hosting management companies have sprung up, providing cleaning and provisioning services with the purpose of making life easier for hosts who don’t have time or inclination to vacuum the room or apartment, and for guests who prefer to have a minimum stock of groceries in the fridge and beds made with clean sheets when they arrive. It falls to Airbnb, as the anchor company – or trusted custodian – to ensure the quality of all these services and interactions and minimize occurrences of fraud or other misbehavior by these service providers.

As is often broadcast in the news, neighborhood associations and city governments are actively investigating what they should, can and can’t regulate. There are neighborhood or building bye-laws and rules governing short-term tenancies which Airbnb hosts regularly flaunt, as well as the question of taxes to be paid for providing for-profit accommodation. This last point is proving to be painful for Uber as well as Airbnb, as taxi drivers and fleets in many cities worldwide and renters or regulators in many of those same cities conduct protests and investigations against these new services. Many of the protests or investigations arise because they sense that their cheese is being moved in a way that they either cannot quite fathom, or find objectionable. On this point, late last week news broke that London’s transport regulator Transport for London announced that Uber can continue to operate in London despite the recent protests by cabbies. The dispute was on a pure technicality; the licensed taxi drivers’ association argued that Uber’s smartphone payments system violates the rule that taxi rides can only be tracked and charged using a meter in the cab. Interestingly, Uber reported an eight-fold increase in sign-ups for the service as a result of last months’ black-cab protest. This shows what reactionary protests can do to provide powerful PR favoring the protested party.

Still on the topic of regulation and supervision, French long-distance ride-sharing startup BlaBlaCar has just announced a $100m. funding round, a record for internet startup in that country. To avoid regulators’ attention on possible tax evasion, this complementary company to urban ride-sharing cousins Lyft and Hitch (which developed a logistics engine to maximize the number of passengers for a given route) forbids participating car owners from profiting from their service. Instead, drivers are supposed to share the costs of the trip with their passengers. It is reported that eight million Europeans now use BlaBlaCar in countries such as Germany, Poland, and eight other countries apart from its home-base, France, and the company reports that it has a million users every month. Among BlaBlaCar’s policing initiatives, it forbids male passengers from traveling in cars driven by a woman. And to ensure that passengers’ privacy is protected they mark in their profile whether or not they are interested in conversation during the trip. “Bla” indicates a preference for little conversation whereas “BlaBlaBla” indicates a total openness to chatting during the trip.

Just as eBay did not remain a marketplace for to trade in their unused or unwanted collectibles, we should not expect the sharing economy to remain only about people renting unused or unwanted items to their peers as a sideline to make some extra cash. Inevitably the profit motive is already attracting new entrepreneurs to build thriving new businesses, in the same vein that thousands of individuals and companies have developed lucrative businesses selling all manner of new as well as used goods on eBay. Indeed, eBay’s origins as a collectibles resale exchange for hobbyists are a distant memory.

Strategic Implications for Insurgents / Disruptors

What does all this mean in terms of strategy for both the asset-sharing internet insurgents and the threatened incumbents that have long made their living from serving the same target customers with their more conventional offerings? Regarding the latter group, don’t count out incumbents such as hotel chains that adapt to the new social and economic forces.

For Airbnb and other sharing economy businesses/companies I see at least five key priorities, some of which have been implied in the examples described above.

The number one sine qua non principle is your obligation to establish and maintain 100% Trust between owners and renters. Occurrences of things going wrong must be kept to a virtually invisible minimum, because hard-earned trust is one asset that can disappear in a second, leaving you with a seriously damaged reputation and a fast-declining business.

Number two on my list is this: Police thyself before someone else finds it necessary to do so. Airbnb now has an eighty-person department dedicated to ensuring trust and safety as a proactive way of avoiding problems rather than having to fight fires once they’ve broken out.

Go out of your way to become a good corporate citizen bringing value to local communities beyond your natural self-interest in avoiding bad press, fines or even jail time. This implies making nice with local and federal governments, tax authorities, trade associations, neighborhood groups, and so on, whichever are most relevant in your line of sharing. For Airbnb this means negotiating tax rates that acknowledge the fact that guests create traffic and use local resources just as hotel visitors or residents do, educating hosts on best practices for keeping renters satisfied, recognizing top hosts as well as top renters (not just by nights stayed or rent paid during a given year, but also by their conduct as a guest), but also proactively working with neighborhood groups and property management companies to negotiate sensible degrees of flexibility in their tenancy and residency rules. It may also mean funding additional security in buildings or neighborhoods where there is a known crime risk, contributing to local residents’ associations and charities, and so on. In this vein Airbnb is currently running ads in New York and other cities broadcasting how it “strengthens communities”; these ads should be supplemented by civic actions such as its rapid response after Hurricane Sandy to get hosts to offer rooms to stranded people at no charge or its ongoing efforts with the Bayshore Group in the Bay Area to draw up contingency plans in case of an earthquake.

Regularly review your differentiation with target customers. As more and more competing players spring up – just look at the myriad home-sharing, ride-sharing, crowd-funding, tool-sharing, and XYZ sharing startups already vying for their share of business – it is imperative that you determine what your current unique differentiation is, who your target sweetspot customer is, and what your complete offering must entail for the renter to write five-star reviews every time they use your service. In Airbnb’s case, its unique differentiation seems to be (a) its global network, (b) its sterling reputation (= trust rating), (c) its integrated solution to the various needs that it helps owner and renters to solve, including the site inspections for safety, its partner network of accommodation management firms, the social-network identification model it uses to check out guests and hosts, its recommendation and review engine, and its integrated payment system for handling all money transfers for transactions on its marketplace, and (d) the network effects that it is now enjoying as a result of all these factors. As the business gets larger and more complex, Airbnb will undoubtedly need to prioritize certain target markets for rapid growth vs. more opportunistic markets where it can play for market share. It is already having to adapt its services to differing needs in, for example, major western capitals vs. smaller cities in far-flung regions where language, culture, customs, and laws differ greatly.

Massive opportunity to orchestrate the new marketplace you have helped to create. This is both an obligation and an opportunity. If Airbnb fails to play this role another company will come along to fill the slot. In reality this is where a smart disrupter can become a powerful ‘honest broker’ to ensure transparency and trust in the entire marketplace. Airbnb should find legitimate ways to partner with accommodation industry incumbents such as guest-houses, hotels and hotel chains, and continue to lead civic initiatives with local governments and other entities.

Strategic Implications for Incumbents / Disruptees

For incumbents who feel unfairly threatened by these new business models that appear at times to be playing by separate rules, there are a matching number of key imperatives:

Ask these two questions: “What are the insurgents doing to draw customers away from us? “ And “which of these things could we or should we be doing ourselves because we could do them better?”

Ask yourself whether your competitive edge has been eroded by the arrival of the new kids on the block. In light of this, what can your core differentiation be going forward in the new disrupted environment?

Ask yourself “why not partner with the disruptive new asset-sharing business?”, or “what new market opportunities does this new situation provide for us?”

Bite the bullet: Identify which part of your business is no longer relevant or valuable to your target customers, and jettison it – as hard to do as this will most probably feel.

Define a new unique value proposition that you can use to re-energize or reinvent your business, and then begin the process of re-equipping your organization, defining a new go-to-market strategy, and so on.

What incumbent organizations that are being disrupted by newcomers cannot afford to do is expend their energy watching, waiting, complaining about the newcomers, putting regulators or other authorities under pressure that they don’t know how to respond to, or instigating lawsuits on trumped-up technicalities in an attempt to slow down the “oncoming train” – all the while doing nothing different to keep your existing business competitive. Continuing the Airbnb example, hotel chains need to ask whether Airbnb is permanently replacing them as the preferred choice for accommodation for their target customers(*). If so, it’s time to review your business assets and strategy in depth; you may need to undergo a reinvention or, if this is not feasible, adopt other tactics such as consolidation through merger or acquisition. Some established companies discover that they have no option but to go out of business but in most cases there are alternatives provided that management is willing to think carefully, make some tough choices to change, etc.

The second thing to do is investigate whether or how to partner with Airbnb by offering spare capacity, just as airlines do with charter companies. Does this mean that Airbnb’s mission will change? It already has. If you look at inventory on Airbnb’s site you will see hotels and guesthouses offering rooms. Another possibility is to establish cooperative financial arrangement for fee-sharing in exchange for each side providing accommodation to the other when inventory is scarce. It may also make sense to acquire an interest in these companies or acquire them outright, and this in turn might accelerate a desired transformation of your business as a guest-house, boutique hotel or hotel chain. None of these options are entirely new ideas – they have been adopted in other industries that have faced serious existential threats from new business models. It’s just that they don’t necessarily occur to you when you feel that you are under siege, and that the world is treating you unfairly by no longer appreciating the value of your current services – a very normal reaction, especially in internally-focused organizations that have forgotten about their customers, but nonetheless a wrong-headed and possibly fatal one.

As for the third priority, a boutique hotel might find, for example, that it can do without advertising for guests by renting opportunistically or exclusively through Airbnb, in which case it can probably cut its advertising budget and discount strategy with Hotels.com, Booking.com, and TripAdvisor to (close to) zero. For a hotel chain, you may find that certain hotels will no longer fill up due to proximity of many Airbnb locations. Thus you may to face up the fact that unprofitable hotels must be sold or closed down. In the short term this is hard to take, but over the long haul it may prove to be extremely beneficial. Slimming down now in order to get healthier over the longer term is always a good thing, and can cause you to refocus on providing more valuable services elsewhere.

Finally, in reinventing your guest-house or hotel business, you might conclude that it makes more sense to compete with Airbnb’s service by developing a more intimate, welcoming experience for guests that would reduce or eliminate their desire to use Airbnb. Or you might figure out a way of providing inexpensive shared accommodations in part of some or all of your hotel properties. You might realize that rigid check-in times should be replaced by flexible check-ins, with guests paying by the hour or for 24-hour periods instead of the current 10-20 hours that most guests get when they have to deal with standard hotel check-in/check-out times. You might provide airport transfers by car, shower rooms for checked-out guests who need to freshen up after a business meeting, before departing for the airport.

All of these last examples relate to friction that hotel guests experience, many of which Airbnb removes, rendering their overall travel experience more rewarding. Interestingly, a number of hotel chains have responded to this “threat” by launching programs of their own to attract more guests. Marriott provides a workspace equivalent with its Workspace-on-Demand program available in 415 of its hotels nationwide, in which it provides conference rooms by the hour, or lobby and other open areas free of charge for businesspeople to hold meetings. LiquidSpace, an online marketplace for short-term workspaces, facilitates on-demand workspace rentals at more than 30 major hotel chains and boutique hotels including Ritz-Carlton, Renaissance, Hilton, Doubletree, Hyatt, and Sheraton. As Mark Gilbreath, founder and CEO of LiquidSpace, says: “Marriott is transforming its brand from not just a place to sleep but to work.” Just think of the possibilities that you can consider if you think outside the normal box, and apply this type of thinking to the core “sleep” part of your offering.

In a nutshell, whenever I think about industry disruptions I am reminded about the well-known Chinese proverb: The definition of crisis is 50% danger and 50% opportunity. It’s up to disrupted incumbents to mentally get past the perceived and real dangers and instead focus on the opportunity that this provides to look at your business in a completely new light and, who knows, discover some exciting new opportunities. Above all, it’s important to keep in mind the longstanding potential of the internet to disrupt virtually every industry on the planet. It’s not personal, it’s just change.

(*) Ideally, target customers are those whom you can serve better and more differently than any competitor can. This excludes opportunistic customers for whom your offer has no detectable differentiation, or for whom your offering is inferior to competing ones. For this type of customer, you will continue to try to win business without expecting to become their default choice.